CHAPTER 1

Introduction to Operations
Management

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 Learning Objectives
• After completing this chapter, you should be able to:
• Define the term operations management
• Identify the three major functional areas of organizations and
describe how they interrelate
• Compare and contrast service and manufacturing operations
• Describe the operations function and the nature of
the operations manager’s job
• Differentiate between design and operation of
production systems
• Describe the key aspects of operations management decision
making
• Briefly describe the historical evolution of
operations management
• Identify current trends in business that impact
operations
management 1-2
(I) Operations Management
• What is Operations?
– The part of a business organization that is
responsible for producing goods or services.

Goods are physical items that include raw materials, parts,

sub-assemblies, such as mother boards that go into
computers, and final products such as cell phones &
automobiles

Services are activities that provide some combination of

time, location, form, or psychological value.

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(I) Operations Management
• Three Basic Functional areas of a Business
Organization
Finance: Responsible for securing & allocating
financial resources, budgeting, analyzing investment
proposals, and providing funds for operations.

Marketing: Responsible for assessing consumer

wants & needs, and selling and promoting
organization’s goods and services.

Operations: Responsible for producing the goods or

providing the services offered by the organization
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Figure 1.1: The Three Basic Functions
of Business Organizations

Organization

Finance Operations Marketing

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(I) Operations Management
• How can we define Operations Management?

“The management of systems or processes

that create goods and/or provide services"

• Operations & Supply chains are intrinsically linked and no

business organization could exist without both.

• A Supply chain is the sequence of the organizations –

their facilities, functions & activities – that are involved
in producing & delivering a product or service (See
Figure 1.2)

• The internal parts of SC are part of the operations

function itself, supplying operations with parts and
materials, performing work on products and/or services, 1-6
(I) Operations Management

• Operations Management affects:

– Companies’ ability to compete

– Nation’s ability to compete internationally

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Figure 1.2: A Simple Product Supply
Chain

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Figure 1.3: A Supply Chain for a
Bread

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(I) Operations Management

• The creation of goods or services involves

transforming or converting inputs into
outputs (See Figure 1.4)

• Table 1.1 provides some examples of inputs,

transformation processes, and outputs.

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 Figure 1.4: The Transformation
Process (Value – Added Process)
Value-Added

Inputs Transformation/ Outputs

•Land •Goods
Conversion
•Labor •Services
•Capital Process
•Information

Feedback

Feedback Feedback
Control

Feedback = measurements taken at various points in the transformation process

Control = The comparison of feedback against previously established
standards to determine if corrective action is needed.

The operations function involves the

conversion of inputs into outputs 1-5
(I) Operations Management

• “Value-added” is the term used to describe

the difference between the cost of inputs and
the value or price of outputs.

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Table 1.1: Examples of Inputs,
Transformation, and Outputs

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Table 1.2: Illustrations of the
Transformation Process

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Production of Goods vs Delivery of
Services
• Products are typically neither purely service- or
purely goods- based

• Productions of goods result in a tangible output –

e.g. an automobile, eye glasses, golf ball, etc.

• Delivery of service, generally implies an act. E.g. A

physician’s examination, TV and auto repair, etc.

• Manufacturing and service are often different in

terms of “what” is done but similar in terms of
“how” it is done.
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Figure 1.3: The Goods-Service Continuum

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Key Differences between Manufacturing
of Goods and Delivery of Service
1. Customer contact
2. Uniformity of input
3. Labor content of jobs
4. Uniformity of output
5. Measurement of productivity
6. Production and delivery
7. Quality assurance
8. Amount of inventory
9. Evaluation of work
10. Ability to patent design

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Table 1.3: Typical difference between
goods and services

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Manufacturing vs. Service?

Manufacturing and Service Organizations differ clearly because

manufacturing is goods-oriented and service is act-oriented.

Goods Services

Tangible Act-Oriented

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 PROCESS MANAGEMENT
• A Process consists of one or
more actions that transform
inputs into outputs.

• In essence, the central role of all

Management is Process
Management

• Businesses are composed of

many interrelated Processes.

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 PROCESS MANAGEMENT – Cont’d
• There are Three categories of
Business Processes;
1. Upper-Management– These govern the
operation of the entire organization. E.g.
Organizational governance and organizational
strategy

2. Operational Processes – These are the core

processes that make up the value stream. E.g.
purchasing, production and/or service, marketing &
sales

3. Supporting Processes – These support the core

processes. E.g. accounting, HR, and IT departments

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 Managing A Process to Meet Demand
• Ideally, the capacity of a process will be
such that its output just matches demand.

• Excess Capacity is wasteful and costly

• Too Little Capacity means dissatisfied

customers & Lost Revenue

Having the right capacity requires having

accurate forecasts of demand, the ability to
translate forecasts into capacity
requirements and a process in place capable
of meeting expected demand.
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 PROCESS VARIATION

• Variation occurs in all business

processes.

• It can be due to Variety or Variability.

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 PROCESS VARIATION – Cont’d
There are Four Basic Sources of Variation;
1. The variety of goods or services offered – Greater the variety,
the greater the variation in production or service
requirements.

2. Structural variation in demand - includes trends & seasonal

variation and are generally predictable

3. Random variation -natural variability is present to some extent

in all processes, as well as demand for services and products,
and it can be generally influenced by managers.

4. Assignable variation – caused by defective inputs, incorrect

work methods, out-of-adjustment equipment and so-on. Can
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be reduced by analysis and corrective actions.
Managing Services is Challenging
1. Jobs in services are often less structured than in
manufacturing
2. Customer contact is generally much higher in services
compared to manufacturing
3. In many services, worker skill levels are low compared to
those of manufacturing employees
4. Services are adding many new workers in low-skill, entry-
level positions
5. Employee turnover is high in services, especially in low-skill
jobs
6. Input variability tends to be higher in many service
environments than in manufacturing
7. Service performance can be adversely affected by many
factors outside of the manager’s control (e.g., employee and
customer attitudes)
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(II) Scope of Operations Management
The scope of operations management ranges across
the organization.
The operations function includes many
interrelated activities such as:
– Forecasting
– Capacity planning
– Scheduling
– Managing inventories
– Assuring quality
– Motivating employees
– Deciding where to locate facilities
– And more . . .

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Table 1.4: Types of Operations

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 Role of the Operations
Manager
• The Operations Function consists of all activities
directly related to producing goods or providing
services.

• A primary function of the operations manager is to

guide the system by decision making.
– System Design Decisions
– System Operation Decisions

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 System Design Decisions

• System Design
– Capacity
– Facility location
– Facility layout
– Product and service planning
– Acquisition and placement of equipment

• These are typically strategic decisions that require

• long-term commitment of resources
• Determine parameters of system operation

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System Operation Decisions

• System Operation
– Management of personnel
– Inventory management and control
– Scheduling
– Project management
– Quality assurance

• Operations managers spend more time on

system operation decision than any other
decision area

• They still have a vital stake in system

design 1-30
Figure 1.4: U.S. Manufacturing vs. Service
Employment

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The Operations Manager and the
Management Process
• The kinds of jobs that operations managers oversee
vary tremendously from organization to organization
largely because of different products or services
involved

• The operations managers must coordinate the use of

resources through management process of planning,
organizing, staffing, directing, and controlling.

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Table 1.6: Responsibilities of Operations Managers

Planning Organizing
• Capacity • Degree of centralization
• Location • Process selection
• Products & Services
• Make or Buy
• Layout
• Projects
• Scheduling

Controlling/Improving Staffing
• Inventory • Hiring/laying off
• Quality • Use of overtime
• Costs
• Productivity

Directing
• Incentive plans
• Issuance of work orders
• Job assignments

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Operations Management & Decision
Making
• Most operations decisions involve many alternatives
that can have quite different impacts on costs or profits

• Typical operations decisions include:

– What: What resources are needed, and in what amounts?
– When: When will each resource be needed? When
should the work be scheduled? When should
materials and other supplies be ordered?
– Where: Where will the work be done?
– How: How will he product or service be designed?
How will the work be done?
How will resources be allocated? 1-34
Operations Management & Decision
Making
• This section describes general approaches
to Decision-Making; including
1. Models
2. Quantitative approaches
3. Performance metrics
4. Analysis of trade-offs
5. Systems approach
6. Establishing priorities
7. Ethics

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 1 - Models
• Modeling is a key tool used by all decision
makers

– A Model is an abstraction of reality; a

simplification of something.

– Common features of models are:

• They are simplifications of real-life
phenomena
• They omit unimportant details of the real-life
systems they mimic so that attention can be
focused on the most important aspects of the real-
life system
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 1 - Models

• Types of Models:
– Physical Models
• Look like their real-life counterparts

– Schematic Models
• Look less like their real-life counterparts
than physical models

– Mathematical Models
• Do not look at all like their real-life
counterparts

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 Understanding Models
• Keys to successfully using a model in
decision-making;

– What is its purpose?

– How is it used to generate results?

– How are the results interpreted and used?

– What are the model’s assumptions and

limitations?

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 Benefits of Models

1. Models are generally easier to use and less expensive

than dealing with the real system
2. Require users to organize and sometimes
quantify information
3. Increase understanding of the problem
4. Enable managers to analyze “What if?”
questions
5. Serve as a consistent tool for evaluation and
provide a standardized format for analyzing a
problem
6. Enable users to bring the power of mathematics to bear
on a problem.
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 Limitations of Models
1. Quantitative information may be emphasized at
the expense of qualitative information

2. Models may be incorrectly applied and the

results misinterpreted
• – This is a real risk with the widespread availability of
sophisticated, computerized models are placed in the
hands of uninformed users.
3. The use of models does not guarantee good
decisions.
4. Nonqualified users may not comprehend the
rules on how to use the model
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 2) Quantitative Approaches

• Quantitative Approaches to problem solving often

embody an attempt to obtain mathematically optimal
solutions to managerial problems.

• These includes;
– Linear programming
– Queuing techniques
– Inventory models
– Project models
– Forecasting techniques
– Statistical models

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 3) Metrics and Trade - Offs
• Performance Metrics
– All managers use metrics to manage and
control operations:
– Profits, costs, productivity and forecast
accuracy.

• Analysis of Trade – Offs

– A trade off is giving up one thing in
return for something else.
– Carrying more inventory (an expense) in
order to achieve a greater level of customer
service.

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 4) A Systems Approach
• System - a set of interrelated parts that must work together
– The business organization is a system composed of
subsystems
• marketing subsystem
• operations subsystem
• finance subsystem
• The systems approach
– Emphasizes interrelationships among subsystems
– Main theme is that the whole is greater than the sum of its
parts
– The output and objectives of the organization take
precedence over those of any one subsystem
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 5) Establishing Priorities

• In nearly all cases, certain issues or items are

more important than others
• Recognizing this allows managers to focus
their attention to those efforts that will do the
most good
– Pareto Phenomenon - a few factors account for a
high percentage of occurrence of some event(s)
• 80–20 Rule: 80% of problems are caused by 20% of
the activities.
• The critical few factors should receive the highest
priority
• This is a concept that is appropriately applied to all
areas and levels of management
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 6) Ethics

• In making decisions, managers must consider

how their decision will affect shareholders,
management, employees, customers, the
community at large, and the environment.

• Finding solutions that will be in best interests of

all of these stakeholders is not always easy, but it
is a goal that all managers should strive to
achieve.

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 6) Ethical Issues in Operations

• Ethical issues 1. Financial statements

arise in many 2. Worker safety
aspects of
3. Product safety
operations
management: 4. Quality
5. The environment
6. The community
7. Hiring and firing
workers
8. Closing facilities
9. Workers rights

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Historical Evolution of OM
• Industrial Revolution

• Scientific Management
– Mass production
– Interchangeable parts
– Division of labor

• Human Relations Movement

• Decision Models and Management Science

• Influence of Japanese Manufacturers
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 A) Industrial Revolution (1770s)
• Pre-Industrial Revolution
– Craft production - System in which highly skilled workers
use simple, flexible tools to produce small quantities of
customized goods

• Some key elements of the industrial revolution

– Began in England in the 1770s
– Division of labor - Adam Smith, 1776
– Application of the “rotative” steam engine, 1780s
– Cotton Gin and Interchangeable parts - Eli Whitney, 1792

• Management theory and practice did not advance appreciably

during this period
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 B) Scientific Management (1911)
• Movement was led by efficiency engineer,
Frederick Winslow Taylor
– Believed in a “science of management” based on
observation, measurement, analysis and improvement of
work methods, and economic incentives

– Management is responsible for planning, carefully

selecting and training workers, finding the best way to
perform each job, achieving cooperation between
management and workers, and separating management
activities from work activities

– Emphasis was on maximizing output

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Scientific Management - contributors

• Frank Gilbreth - father of motion studies

• Henry Gantt - developed the Gantt chart scheduling
system and recognized the value of non-monetary
rewards for motivating employees
• Harrington Emerson - applied Taylor’s ideas to
organization structure
• Henry Ford - employed scientific management
techniques to his factories
• Moving assembly line
• Mass production

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C) Human Relations Movement (1920–60)

• The human relations movement emphasized the

importance of the human element in job design
– Lillian Gilbreth
– Elton Mayo – Hawthorne studies on worker motivation,
1930
– Abraham Maslow – motivation theory, 1940s; hierarchy of
needs, 1954
– Frederick Hertzberg – Two Factor Theory, 1959
– Douglas McGregor – Theory X and Theory Y, 1960s
– William Ouchi – Theory Z, 1981

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 D) Decision Models & Management
Science (1915, 1960 – 70s)
• F.W. Harris – mathematical model for inventory
management, 1915

• Dodge, Romig, and Shewart – statistical procedures

for sampling and quality control, 1930s

• Tippett – statistical sampling theory, 1935

• Operations Research (OR) Groups – OR applications

in warfare

• George Dantzig – linear programming, 1947

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E) Influence of Japanese Manufacturers

• Refined and developed management practices that

increased productivity

– Credited with fueling the “quality revolution

– Just-in-Time production

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Key Trends and Issues in Business

• Internet, E-Business & E-Commerce

• Management of Technology
• Globalization
• Management of Supply Chains
• Outsourcing
• Agility
• Ethical Behavior

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 Simple Product Supply Chain
Figure 1.7

Suppliers’ Direct Final

Producer Distributor
Suppliers Consumer
Suppliers

Supply Chain: A sequence of activities and

organizations involved in producing and delivering
a good or service

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Elements of Supply Chain Management
• Customers – what products/services do customers want
• Forecasting – predicting timing and volume of customer
demand
• Design – incorporating customer wants, manufacturability, and
time to market
• Capacity planning – matching supply and demand
• Processing – controlling quality, scheduling work
• Inventory – meeting demand requirements while managing
costs
• Purchasing – evaluating potential suppliers, supporting the
needs of operations on purchased goods and services
• Suppliers – monitoring supplier quality, on-time delivery, and
flexibility; maintaining supplier relations
• Location – determining the location of facilities
• Logistics – deciding how to best move information and
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materials
THANK YOU

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